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Immediately due liabilities ratio

Method of calculation

Formula for immediately due liabilities ratio: cash and other pecuniary assets / (short-term liabilities - short-term liabilities above 12 mths + current principal repayment)

Ratio's description

This ratio complements the assessment of company's financial liquidity seen from the static viewpoint. It indicates the ability to cover the immediately due short-term liabilities with cash and other pecuniary assets.

Ratio's interpretation

  • The value of this ratio should neither be too low nor too high. It is assumed that the value should hover around 0.2 (i.e. 20%).
    • ratio's value which is much lower than the recommended 0.2 may indicate insufficient level of cash and other pecuniary assets with respect to the level of immediately due liabilities, which in turn may lead to problems with maintaining financial liquidity,
    • ratio's value which is much greater than the recommended 0.2 may indicate an excess level of cash and other pecuniary assets with respect to immediately due liabilities, which in turn may lead to lowered operating efficiency resulting from excess liquidity.
  • When assessing the changes in the ratio value over time (over few periods):
    • maintaining the ratio's value around 0.2, or actions leading to this value are considered positive, since they indicate proper financial liquidity,
    • the increase of ratio's value much above 0.2 is considered negative, due to the risk of excess liquidity,
    • the decrease of ratio's value much below 0.2 is considered negative, due to the risk of loss of financial liquidity.

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